Student loans may seem simple on the surface, but borrowers may face some complexities during the financial aid lending process.
One of the biggest points of confusion among borrowers is where the money goes after financial aid is approved. Disbursement of student loan funds is not as straightforward as receiving a check in the amount of your new loan. It involves much more than the lender simply handing over the cash to the borrower.
In this article, we go over how student loan disbursement works for federal and private loans and what complications may arise during the process.
In this guide:
- What is a student loan disbursement?
- How does student loan disbursement work?
- Federal student loan disbursement
- Private student loan disbursement
- Why do funds have to be disbursed to the school before the borrower?
- How can the disbursement of a refinanced loan lead to complications?
- Plan ahead when taking out student loans
What is a student loan disbursement?
Student loan disbursement is the process by which loan funds are paid out to cover higher education expenses. Understanding student loan disbursement matters for ensuring that the money you need to pay for school gets to where it needs to go.
When student loan funds are disbursed and whether they’re paid to the school or the borrower depends on the type of loan. The private student loan disbursement process also depends on which lender you choose.
How does student loan disbursement work?
Student loans are sent directly to the borrower’s school according to a schedule established by individual colleges and universities. In most cases, this schedule aligns with the beginning of the semester or academic year.
When you’re approved for student loans, the money is sent to the school to cover qualified education expenses. Following the IRS definition, qualified education expenses include tuition, fees, and other related expenses to cover the cost of attendance at an eligible educational institution.
Loans are disbursed to the school first to ensure that all necessary expenses are paid ahead of the student’s attendance. Any remaining amounts can then be disbursed to the student in the form of a refund. Parents who take out Direct PLUS loans or private parent student loans can also receive refunds.
Student loan refunds can be used to pay for any education costs that have not already been paid. For example, students may use their refund to pay rent or basic living expenses. They can also apply refunds to their student loan balance if they don’t need the money for any other school-related costs.
This is the general process for the disbursement of student loans. There are, however, some differences between federal student loan disbursement and private student loan disbursement.
Federal student loan disbursement
Federal student loans are administered through the Department of Education. Borrowers must complete the Free Application for Federal Student Aid (FAFSA) to establish eligibility for federal student loans.
Federal student loan options include:
- Direct Subsidized Loan
- Direct Unsubsidized Loan
- Direct PLUS Loans
- Direct Consolidation Loan
How long does it take to get a student loan disbursement? In most cases, funds should be disbursed within 10 days of the start of classes. That’s according to the Federal Student Aid Handbook.
When a federal student loan is approved, the U.S. Treasury Department transfers the funds to the Department of Education. The Department of Education confirms the loan amount and other details with the school, including disbursement dates and when funds are sent.
Once funds are received, the school uses them to pay the borrower’s qualified education expenses. Any leftover amounts are disbursed directly to the borrower in the form of a refund. The borrower can then decide how those funds should be used.
If you’re a first-time borrower and a first-year undergraduate, you may have to wait 30 days after the first day of your enrollment period before the school is allowed to disburse extra student loan funds. First-time borrowers of Direct Subsidized and Unsubsidized Loans and graduate or professional Direct PLUS Loans may also be required to complete entrance counseling before loans can be disbursed.
Entrance counseling is designed to ensure that borrowers understand the terms and conditions of their loans. The counseling session covers what a loan is, how interest works, options for repayment, and what happens if you default on the loan. Borrowers who are required to complete entrance counseling must do so before loan funds can be disbursed.
After federal loans are disbursed, the student has 120 days to cancel the loan with no interest or fees. Students can cancel part or all of the loan amount that was received.
How does a government shutdown affect student loan disbursement?
Government shutdowns do not affect a student’s ability to complete and submit the FAFSA and apply for federal aid. The Office of Federal Aid can continue to process applications for federal student loans and grants during this time.
Likewise, federal student loan servicers continue operations even when the government is in shutdown mode. For borrowers, that means little to no impact on their loans, including the disbursement process.
Private student loan disbursement
Private students are offered by private lenders, rather than through the Department of Education. As such, there can be some variation when it comes to private student loan disbursement and how the process works. If you have private student loans, it’s helpful to ask your loan servicer about their specific timeline.
Some private lenders may disburse loans to the school while others can distribute funds directly to the borrower. When a loan is made directly to the student, it’s the borrower’s responsibility to make sure that tuition, fees, and other qualified expenses are paid.
The mechanics of private student loan disbursement to the school works much like federal student loans. Once you’re approved for a loan, the lender has to certify the loan with the school and verify your enrollment status, costs of attendance, and expected graduation date.
When the school receives the loan, the lender sends the loan amount to cover tuition, fees, and other costs. Any remaining amount is disbursed to the student as a refund.
The process for disbursement of student loan funds can vary from lender to lender. Here’s how private student loan disbursement works with some popular lenders:
- College Ave. College Ave disburses all undergraduate loans directly to the school. The school applies the loan to outstanding balances, then refunds any remaining funds to the borrower. Once the school certifies the loan, you’ll receive a notification from College Ave that includes disbursement dates.
- Sallie Mae. Once a Sallie Mae loan is approved, a certification request is sent to the school. Loan funds are disbursed to the school once certification is received and the right to cancel period expires, with any remaining amounts refunded to you.
- Discover. Discover follows the disbursement timetable established by the school. Once the school determines that you need the funds, they’ll schedule the disbursement of loan funds. If you need disbursement ahead of the school’s selected date, you can talk to the financial aid office to see if expediting the release of funds is possible.
- Ascent. Ascent sends funds to your school at the school’s request, once the loan has been certified. Loans cannot be disbursed until the school completes the certification process.
- Earnest. Once you sign a loan agreement with Earnest, the loan certification process begins. This can take one to three weeks, depending on the school. Following certification, there is a three-day mandatory cooling period before loan funds are disbursed directly to the school.
Why do funds have to be disbursed to the school before the borrower?
Student loans get disbursed to schools first for one simple reason: to ensure that the student’s necessary costs of attendance are paid. The school will verify whether the loan aligns with the cost of education or if any adjustments need to be made.
Disbursing student loans to the school is a form of risk management for lenders. By paying the school first and refunding any overage amounts to the student second, the lender ensures that a borrower isn’t taking out large loans and using them for purposes other than education.
Direct student loan disbursement also benefits the borrower. Even if your only intention is using loan funds to pay for school-related expenses, you might not know where to send the money once you receive it. Direct disbursement saves you the trouble of having to make payments to the school and it means you don’t have to worry about missing any payment deadlines.
How can the disbursement of a refinanced loan lead to complications?
Student loan disbursement can become complicated if you’re refinancing private student loans or consolidating federal student loans. The disbursement timeline will depend on the lender but if you’re no longer in school and you’re refinancing, the new lender will disburse funds to your old lender.
It’s important to understand the timing when refinancing student loans to avoid the possibility of late or missed payments. Disbursements can take time to process so you may need to make payments to the old loan until funds are sent to the lender.
Doing so can help you avoid any late payments being reported to the credit bureaus. Negative payment history can have a significant impact on your credit scores. Keeping track of payment due dates during the refinancing process can also help you avoid late fees.
Plan ahead when taking out student loans
The most important thing to keep in mind about student loan disbursement is that it’s typically not a speedy process. You may apply for federal or private student loans and be approved within days but disbursement of those loans could take several weeks or even months.
For that reason, it’s helpful to start the student loan application process well ahead of the semester or term for which you’ll need them. That can help you to avoid a scenario in which you’re ready to start school but your loans are left in disbursement limbo.
If loan funds are late in arriving, your school could charge you late payment fees or finance charges. The school may agree to reverse those charges once your loan funds are disbursed. As long as the anticipated aid exceeds the tuition, fees, and other charges due, then your classes should not be dropped while you’re waiting for disbursement.
Applying early for federal or private student loans can be the best way to avoid any potential issues involving late disbursements. Once you’re approved for loans, you can connect with your lender or loan servicer to find out when they’ll be disbursed. You can also follow up with the school as the semester or term start date approaches to make sure loan certification and disbursement are going smoothly.
>> Read More: Learn more about how student loans work